HFT, Rigged Markets and The Man

April 3 - Bloomberg (Silla Brush): "The U.S. Commodity Futures Trading Commission
is reviewing futures markets to ensure high-speed trading isn't violating the
law, acting CFTC Chairman Mark P. Wetjen told reporters... 'I don't have the
impression at the moment that futures markets are rigged,' Wetjen said... He
was responding to comments by Michael Lewis, author of the book 'Flash Boys,'
that investors are being robbed by traders using advanced computers to jump
ahead of their trades."

Charles Schwab stated that "High-frequency trading is a growing cancer that
needs to be addressed... High-frequency traders are gaming the system, reaping
billions in the process and undermining investor confidence in the fairness
of the markets."

I'm definitely no fan of high-frequency trading (HFT). Still, it's difficult
for me to get all that worked up on this particular issue. I guess I've seen
too much during my going on 25 years in the financial markets. This week Michael
Lewis created a firestorm with his assertion that markets are "rigged." Are
they rigged? There is clearly a prevailing "rigging" element, yet the high-frequency
traders are bit players. HFT is symptomatic. They're not the "cancer."

Credit is inherently unstable. Always has been. History has also clearly demonstrated
that stock markets are prone to destabilizing bouts of exuberance, intense
speculation and spectacular boom and bust cycles. Nurture a Credit system dominated
by marketable instruments and you've created a highly unstable Credit mechanism.
Allow marketable securities to inflate to 400% of GDP and you've created highly
unstable financial and economic systems. Push everyone into a securities market
Bubble and then you're really trapped. Policymaker rationalizations and justifications
even foster the delusion that rigging markets is good and reasonable policy.

The early-nineties was a critical period for the interplay between policymaking
and increasingly speculative financial markets. The activist Greenspan Federal
Reserve promoted market-based Credit (MBS, ABS, securitizations, derivatives,
etc.) to help compensate for the banking system's incapacity to provide sufficient
Credit to the real economy. The symbiotic relationship between the leveraged
players and GSE securities took root. But as 1994 demonstrated, all this New
Age speculative leverage was acutely susceptible to interest-rate uncertainty,
de-leveraging and a highly unstable (boom & bust) liquidity dynamic.

I was never comfortable with the Fed's push to so-called "transparency." For
me, it was fundamental to the "Maestro" assuming too much control over the
financial markets. Indeed, never had a central bank enjoyed such dominance
over finance. Greenspan could spur stock and bond market rallies (wealth creation!)
with a simple utterance on rate policy. For the economy as a whole, Credit
Availability and, more generally, "financial conditions" became chiefly dictated
in the securities markets - and the Fed chairman had powerful new levers to
govern market behavior.

Greenspan moved forward with transparently pegging short-term interest rates.
Moreover, he made it clear that he would allow the markets to run on the upside
(pro-Bubble) while promising to aggressively cut rates and inject liquidity
if markets faltered to the downside (Bubbles burst). The hedge fund community
took off, the GSEs took off, derivatives took off, "Wall Street finance" took
off and a historic Credit Bubble took flight. Stocks, bonds, derivatives and
system Credit all became "rigged" to the upside. The markets buckled short-term
in 1998 (the LTCM collapse) and on a somewhat more extended basis in 2000;
potential critical market junctures that were rectified through progressively
more aggressive market intervention.

The 2008 crisis was another critical juncture in a financial Bubble that had
inflated to systemically dangerous proportions. The "rigged" market throughout
mortgage finance collapsed with predictable consequences for the leveraged
players, asset markets and real economy. The Fed and Washington rushed to bail
out a system that had clearly turned highly dysfunctional and maladjusted.
Bernanke moved aggressively with his "helicopter money" and "government printing
press." Fatefully, Washington took an even larger role throughout the economy
and markets.

Oblivious to its previous policy failures, the Federal Reserve's "rigging" of
the financial markets became only more prominent and purposely conspicuous.
Since 2008 the Fed has ballooned its balance sheet from $900bn to $4.3 TN with
the stated intention of inflating stock and bond prices. They took their market
liquidity backstop role to a whole new level. The Fed has also taken interest-rate "transparency" into
uncharted waters. This is all part and parcel to the "rigged" financial markets
I worry deeply about.

When I started with my career in the markets, the hedge fund industry was
thought to be less than $40bn. It had grown 10-fold by (party like it's) 1999.
Estimates have hedge fund assets surpassing $3.0 TN this year. "Sovereign wealth
funds" weren't a force in the nineties. The exchange-traded fund (ETF) industry
didn't even exist. These days, after doubling in four years, ETF assets total
$2.4 TN. A headline from this weekend's Financial Times caught my eye: "High
Drama in Murky Link Between ETFs and HTF." And when it comes to "murky links," I
suspect the equities derivative marketplace is today bigger and more impactful
than ever. Over recent years, there has been a proliferation of instruments
and products that make it so easy to jump on board the raging bull. There are
these days Trillions of speculative finance playing little more than trend-following
strategies. The market is going up - the Fed is ensuring it goes up - so buy.
Leverage makes for higher returns.

From my perspective, government rigging the cost and quantity of finance for
more than 20 years guarantees that lots of unsavory things are going to develop
(fester). For one, asset prices throughout the system will be subject to gross
mispricing. Risk misperceptions will become deeply entrenched. To be sure,
pegged rates and liquidity backstops incentivize leveraged speculation. Those
best at playing the game - particularly the champions at anticipating monetary
policy - grow to incredible size. Generally, those with the best government
connections (in the U.S., Europe, Asia and EM) have a decided advantage over
the rest of us. And as a limited number of powerful market operators dominate,
traditional market trading dynamics give way to speculation more akin to a
poker game (with chips piling up on one side of the table - the unsuspecting
up against "the family"). There was clear justification for the government
moving aggressively (Glass-Steagall) to rein in the big and powerful financial
institutions after the devastating collapse of the "Roaring Twenties" Bubble.

And as the media fixated this week on HFT, market internals seemed to indicate
some concern for the health of the U.S. stock market Bubble. Friday's trading
session began with yet another S&P500 record high - but ended with some
blood on the street. Many prominent Bubble stocks were under intense selling
pressure.

In market analysis over the years I've noted the "crowded trade" dilemma.
Too much speculative ("hot money") finance gravitating to one sector or asset
class significantly alters the nature of the marketplace. Trading becomes more
speculative, prices increasingly unstable and the market in general much more
prone to boom and bust dynamics. QE3 ensured a major influx of destabilizing "hot
money" and a highly speculative U.S. equities market akin to one gigantic "crowded
trade." The bulls have enjoyed a great run. At least in the high-flyers, the
downside of "price instability" has rather quickly become a pressing issue.

Federal Reserve Bank of Dallas President Richard Fisher offered valuable insight
Friday in remarks before the Asia Society in Hong Kong. I'm providing extensive
excerpts, but I strongly encourage readers to study his entire speech available
at the Dallas Fed's website. Mr. Fisher has risen to become a dominant force
in the evolving monetary policy debate. He's now "The Man." There was even
mention Friday on CNBC of the possibility of a future Fisher Fed Chairmanship.
Count me as a strong supporter. For now, it's encouraging to pull sound monetary
policy thinking from a U.S. policymaker.

From Richard Fisher's "Forward Guidance," April 4, 2014: "The Fed's large-scale
asset purchases dramatically and more broadly impacted credit markets. The
U.S. credit markets are awash in liquidity. As of March 14, our par holdings
of fixed-rate MBS exceeded 30% of the outstanding stock of those securities...
We now own just shy of 24% of the stock of Treasury coupon securities. Having
concentrated our purchases of Treasuries further out on the yield curve,
and done so in size, we have driven nominal interest rates across the credit
spectrum to lows not seen in over a half century.

This has allowed U.S. businesses to restructure their balance sheets, manage
their earnings per share through share buybacks financed with bargain-basement
debt issuance, bolster stock prices through enhanced dividend payouts and
position themselves for financing growth once they see the whites of the
eyes of greater certainty about their economic future. By driving nominal
interest rates to half-century lows, we have also reduced the hurdle rate
by which future cash flows of publicly traded businesses are discounted.
Thus, through financial engineering, we have helped bolster a roaring bull
market for equities: The indexes for stocks have nearly tripled from the
lows reached in March 2009.

Alongside these signs of rebound have been some developments that give
rise to caution. I have spoken of these in recent speeches, echoing concerns
I have raised in FOMC discussions: The price-to-earnings (PE) ratio of stocks
is among the highest decile of reported values since 1881. Bob Shiller's
inflation-adjusted PE ratio reached 26 this week as the Standard & Poor's
500 hit yet another record high. For context, the measure hit 30 before Black
Tuesday in 1929 and reached an all-time high of 44 before the dot-com implosion
at the end of 1999... Since bottoming out five years ago, the market capitalization
of the U.S. stock market as a percentage of the country's economic output
has more than doubled to 145% -- the highest reading since the record was
set in March 2000. Margin debt has been setting historic highs for several
months running and... now stands at $466 billion. Junk-bond yields have declined
below 5.5%, nearing record lows.... In my Federal Reserve District... bankers
are reporting that money center banks are lending on terms that are increasingly
imprudent.

The former funds manager in me sees these as yellow lights. The central
banker in me is reminded of the mandate to safeguard financial stability...
At the current reduction in the run rate of accumulation, the exercise known
as QE3 will terminate in October (when I project we will hold more than 40%
of the MBS market and almost a fourth of outstanding Treasuries)...

Enter Forward Guidance. This is no small matter. Quantitative easing has
made life easy not only for corporate treasurers and homeowners and consumers
burdened by debt, but also for money market operators. It has run up the
price of stocks and bonds mostly in straight-line fashion, and it has taken
volatility out of the marketplace, allowing market operators and their clients
to profit with little effort. The question of when and under what conditions
the FOMC will begin to raise the base rate off the floor is understandably
of intense interest.

Research papers have addressed this subject. For example, some academic
economists draw on Greek mythology to distinguish different techniques for
crafting forward guidance, making a distinction between Odyssean and Delphic
forms of guidance. The Odyssean model involves committing to a policy rule
or to a criterion for choosing between different policy alternatives. Policymakers
tie themselves to the mast of this rule or criterion, sacrificing some of
their short-run freedom of action in order to achieve what they hope will
be superior outcomes over the long term...

Commitments come in lots of different flavors and styles, and forward guidance
isn't necessarily helpful or wise just because it's Odyssean. Tying yourself
to the mast isn't an especially good idea if your ship is sinking, or if
enemy forces are directing fire toward your deck. Committing to a particular
path for the funds rate, or to a time schedule for funds-rate liftoff, is
not something in which I or many of my colleagues have any interest...

My own view is that commitments aren't always credible, especially if they
purport to extend far into the future... As a general rule, then, the further
into the future a commitment extends, the vaguer it tends to be. Along these
lines, the FOMC periodically reiterates its commitment to do what it is legally
mandated to do: pursue full employment, price stability and a stable financial
system...

Delphic forward guidance is less binding than Odyssean guidance. Like the
responses of the oracle of Apollo at Delphi, it is more obscure, more enigmatic.
It amounts to saying, 'Here's what we think we are going to want to do if
the economy evolves as we currently expect.' Delphic guidance clarifies your
current thinking about future policy without making any promises -- even
contingent promises. Our current FOMC statement is chock-full of Delphic
guidance...

As a former practitioner, I can tell you that market operators prefer Odyssean
guidance to Delphic guidance, and within the Odyssean model, tend to prefer
inflexible, calendar-based guidance to guidance that's either conditional
or qualitative. Life in my former incarnation would naturally be much more
pleasant if I could dial in the specific dates and levels of interest rate
movements. But as a central banker, I am haunted by a comment made by Winston
Churchill in 1926, shortly before things began to unravel in the global financial
markets. Speaking at the Waldorf Hotel in London, he said: 'In finance, everything
that is agreeable is unsound and everything that is sound is disagreeable.'

I worry that the predictability of calendar-based commitments can quite
possibly be unsound in two key dimensions. First, the quantitative moorings
may be misplaced -- especially given shifts in economic relationships following
the worst downturn since the Great Depression. Second, I question if it is
sound policy to remove all uncertainty or volatility from the market. I wonder
whether being totally predictable may, at best, lead to a false complacency
that can too easily be upset should we need to change course. At its worst,
I fear calendar-based commitments can lead, perversely, to market instability
by encouraging markets to overshoot, as they appear to be doing in some quarters
at present... The point is: Forward guidance can be a complicated monetary
policy tool...

This is the very best we can offer you... Those who think we can be more
specific in stating our intentions and broadcasting our every next move with
complete certainty are, in my opinion, clinging to the myth that economics
is a hard science and monetary policy a precise scientific procedure rather
than the applied best judgment of cool-headed, unemotional decision-makers."

Global central bank "international reserve assets" (excluding gold) - as tallied
by Bloomberg - were up $778bn y-o-y, or 7.1%, to a record $11.732 TN. Over
two years, reserves were $1.446 TN higher for 14% growth.

Money market fund assets fell $13.1bn to a 24-week low $2.630 TN. Money Fund
assets were about unchanged from a year ago.

Total Commercial Paper jumped $8.4bn to $1.034 TN. CP was down $12bn year-to-date,
while increasing $32bn over the past year, or 3.1%.

Currency Watch:

April 2 - Bloomberg (John Detrixhe, Nikolaj Gammeltoft and Sam Mamudi): "Forget
the equity market. For high-frequency traders, the place to be is foreign exchange.
Firms using the ultra-fast strategies getting scrutiny thanks to Michael Lewis's
book 'Flash Boys' account for more than 35% of spot currency volume in October
2013, up from 9% in October 2008, according to consultant Aite Group LLC. It's
the opposite of equities, where their proportion shrank to 50% in 2012 from
66% four years ago, according to Rosenblatt Securities Inc. As brokers get
better at cloaking orders and volume shrinks in stocks, speed trading remains
a growth business in the $5.3 trillion foreign-exchange market, where authorities
on three continents are examining the manipulation of benchmarks..."

The U.S. dollar index gained 0.3% to 80.42 (up 0.5% y-t-d). For the week on
the upside, the South Korean won increased 1.55, the Brazilian real 1.1%, the
Taiwanese dollar 0.8%, the Canadian dollar 0.7%, the Mexican peso 0.5%, the
Australian dollar 0.5%, the South African rand 0.1% and the Norwegian krone
0.1%. For the week on the downside, the Swedish krona declined 0.8%, the New
Zealand dollar 0.7%, the Swiss franc 0.6%, the Japanese yen 0.5%, the British
pound 0.4%, the euro 0.3% and the Danish krone 0.3%.

April 3 - Financial Times (Tracy Alloway, Michael Mackenzie and Arash Massoudi): "On
a mild spring day in New York, representatives from Citigroup set out to introduce
investors to the bank's new subprime securitisation platform. This might sound
like a scene plucked from 2007, at the height of the credit bubble that eventually
sparked the financial crisis, but Citi's 'roadshow' began only this week...
In doing so, Citi is aiming to tap into a wave of investor demand for higher-yielding
securities created from sliced-and-diced loans that it makes to riskier borrowers.
The planned sale is symptomatic of a wider development in credit markets as
the thirst for increased returns has led to fears about possible overheating
and provoked public soul-searching by central bankers. Parts of Wall Street's
securitisation machine have shifted into higher gear, while sales of junk-rated
bonds have surged and lending to highly-leveraged companies has surpassed its
pre-2008 level... Central bankers have been debating whether monetary policy
should take into account asset bubbles ever since the low interest rates cultivated
under Alan Greenspan were blamed for herding investors into riskier investments
in the years preceding 2008. However, in recent months, that debate has become
increasingly public as credit markets continue their upward trajectory... Banks
sold $161.8bn worth of leveraged loans in the first quarter of 2014, according
to S&P Capital IQ data. That is below the $189bn sold last year in the
same period, but still ranks as one of the highest quarterly levels ever recorded."

April 3 - Bloomberg (Kristen Haunss): "The biggest month in sales of collateralized
loan obligations since 2007 is easing concern that new regulations designed
to limit risk-taking will damp demand for funds that package junk-rated loans.
After CLO issuance plummeted in January, sales rebounded and jumped to $10.8
billion last month, according to Wells Fargo..., the biggest monthly volume
since May 2007. The market for CLOs, which helped finance some of the biggest
leveraged buyouts in history, are under increasing regulatory and legislative
scrutiny as issuance ballooned to a six-year high of $82 billion last year.
While March's boost wasn't enough to keep first-quarter sales from declining,
deals are now being structured to comply with rules aimed at making the financial
system safer and prompted Wells Fargo to increase its CLO issuance forecast
for 2014."

April 1 - Barron's (Michael Aneiro): "Leveraged loans remain in vogue with
investors, and the first quarter of 2014 produced $276 billion of leveraged
loan issuance, the third-highest quarterly total since Thomson Reuters LPC
began tracking the loan market in 1987. The only two quarters with higher tallies
both came last year. 'A limited supply of M&A deals coupled with strong
investor demand set the stage for a slew of refinancings, which drove the bulk
of lending activity in 1Q14 as issuers cut costs and pushed out maturities,'
said Ioana Barza, director of analytics, Thomson Reuters LPC, who noted that
the $180.5 billion of leveraged refinancings last quarter represented a 22%
rise from the prior quarter. This near-record issuance comes as the covenants,
or investor protections, that govern such loans continue to weaken."

April 1 - Bloomberg (Charles Mead and Matt Robinson): "Lenders from JPMorgan...
to Bank of America Corp. warned that corporate-bond buyers were in for another
year of rising yields that would erode returns. China, the polar vortex and
Vladimir Putin are upending those forecasts. Bonds of companies worldwide tracked
by Bank of America Merrill Lynch indexes returned 2.7% in the first quarter
through March 31, compared with a 1.42% gain for the MSCI World Index of stocks,
the first time the debt beat equities since the second quarter of 2012... 'It
wasn't perhaps the one-way bet that people thought it was,' said Andrew Chorlton,
a... money manager for a Schroders Plc unit that oversees more than $90 billion.
Bonds beating stocks is 'contrary to what virtually every investment bank you
care to mention had on their outlooks for 2014.'"

Federal Reserve Watch:

April 4 - Reuters (Michael Flaherty): "The U.S. Federal Reserve must avoid
being locked into calendar-based policy commitments and instead ensure its
forward guidance is flexible enough to allow it to respond to changing conditions,
a top Fed official said... Dallas Federal Reserve Bank President Richard Fisher
said he worried that predictable commitments were unsound policy as they could
lead to false complacency and market instability. 'I question if it is sound
policy to remove all uncertainty or volatility from the market,' Fisher...
said... 'At its worst, I fear calendar-based commitments can lead, perversely,
to market instability by encouraging markets to overshoot, as they appear to
be doing in some quarters at present,' Fisher said... 'Those who think we can
be more specific in stating our intentions and broadcasting our every next
move with complete certainty are, in my opinion, clinging to the myth that
economics is a hard science,' Fisher said. Fisher said markets and investors
often sought to infer specific dates and targets from guidance, even though
the Fed was only explaining its thinking without making any promises. 'The
FOMC is seeking to make sure that we have a sustained recovery without giving
rise to inflation or market instability. We will conduct monetary policy accordingly,'
Fisher said. 'Regardless of the way we may finally agree at the FOMC to write
it out or have Chair Yellen explain it at a press conference, we really cannot
say more than that.'"

April 2 - Bloomberg (Jeff Kearns): "Federal Reserve Bank of Atlanta President
Dennis Lockhart says reversing course on the trimming to Fed bond buying 'requires
a substantial deterioration of economic conditions which I certainly do not
anticipate.' Tapering of so-called quantitative easing 'should continue and
play out over the course of this year and we will try to shape economic conditions
using the policy rate and forward guidance,' Lockhart says... Main consideration
is 'the ability to begin to shrink the balance sheet and to neutralize those
excess reserves,' and 'the tools exist and area already well proven to do that...'"

April 4 - Bloomberg (Craig Torres and Michelle Jamrisko): "Federal Reserve
officials were told in December 2008 that they would have to buy 'very large'
quantities of U.S. Treasury and housing-agency debt to have an impact on the
economy as they considered alternatives to cutting interest rates that were
heading toward zero. 'The evidence suggests that this policy tool could have
the desired effects, but that the scale of the purchases would have to be very
large,' a team of Fed staff economists said... According to the documents,
staff estimated that a purchase of $50 billion of longer-term Treasury securities,
or about 1% of all marketable Treasury debt held by the public, would lower
the yield on 10-year notes 'somewhere between 2 and 10 bps.'"

U.S. Bubble Watch:

April 1 - Bloomberg (Thomas Black and Richard Clough): "The polar vortex that
blanketed big swaths of the U.S. with snow this winter is also giving cover
to companies seeking to explain why earnings rose last quarter at the slowest
pace in almost two years. Freezing temperatures and mountains of snow in the
first three months of 2014 kept shoppers indoors, grounded flights and made
it harder for shippers to fill product orders... Earnings at Standard & Poor's
500 Index companies rose an estimated 1.1% in the first quarter, according
to analysts' estimates compiled by Bloomberg, slower than the 8.8% increase
in the previous three months and the lowest rate since the second quarter of
2012."

March 29 - Los Angeles Times (Tim Logan): "This time last year, investment
firms raced to buy dozens of single-family homes in neighborhoods from Fontana
to South Los Angeles to lease them out, transforming the mom-and-pop rental
business into a Wall Street juggernaut. The flood of cash helped spark a steep
rise in prices, drawing criticism for pushing families out of the market. But
now the firms themselves have all but stopped buying in Southern California,
the latest evidence that home prices have hit a ceiling. The professional investors
no longer see bargains here. The real estate arm of Blackstone Group, the largest
buyer, has cut its California purchases 90% over the last year... 'Private
capital made a lot of money early, and now they're starting to pull back,'
said Dave Bragg, who heads residential research at Green Street Advisors...
'Home prices are up significantly, and houses are definitely less attractive.'
...Experts say an expanding supply should help usher in a healthier housing
market, with a better balance between buyers and sellers. That's a stark change
from last year, when buyers faced bidding wars. All the activity drove the
region's median home price up to $385,000 by last June, a record 28% increase
over the same month a year earlier, according to San Diego research firm DataQuick.
But prices have since been flat in Southern California... 'Prices have gotten
to the stage where we cannot buy a house, renovate it, rent it and still make
a reasonable return,' said Peter Rose, a spokesman for Blackstone, which owns
roughly 41,000 rental houses nationwide. 'There was a moment in time where
it made sense.' Among the 20 firms buying the most California real estate since
January 2012, purchases are down more than 70% compared with last year in each
of the last four months, according to DataQuick."

April 1 - Bloomberg (Oshrat Carmiel): "Manhattan apartment sales surged in
the busiest start to a year since 2007, setting price records as buyers vied
for a limited supply of homes for sale and deals were completed at new high-end
developments. Sales of co-ops and condominiums in the first quarter jumped
35% from a year earlier to 3,307, according to... appraiser Miller Samuel Inc.
and brokerage Douglas Elliman Real Estate. The median price climbed 19% to
$972,428, while the average price per square foot rose 24% to $1,363, the highest
in 25 years of record-keeping. Price gains are accelerating in a market where
the inventory of homes for sale plummeted to record lows three times in the
past year as buyer demand increased. Of the deals completed in the first quarter,
38% were at or above the asking price, up from 17% a year earlier, according
to Jonathan Miller, president of... Miller Samuel. 'We're finally at a point
where you're seeing the chronic lack of supply push prices higher,' Miller
said... 'The market really isn't fun for the buyer.' ...Transactions at newly
constructed buildings set a record, averaging $1,834 a square foot, the firms
said. Many new condo towers have larger units and are aimed at luxury buyers.
Completed deals at Extell Development Co.'s One57 in Midtown, as well as downtown's
One Madison and Chelsea's Walker Tower, all averaged more than $3,000 a square
foot... The quarter's two sales for more than $40 million were both penthouses
in new developments... Older properties weren't left behind. Resale prices
averaged $1.47 million, a 19 percent jump from a year earlier, Heym said."

April 1, 2014 - New York Times (Michelle Higgins): "The Manhattan real estate
market got off to a robust start in the first three months of the year, as
signed contracts for ultraluxury apartments in new developments began to close,
many with multimillion-dollar price tags... The flurry of activity at the top
pushed the number of sales to a seven-year high for the quarter and sent the
average price per square foot soaring to a record $1,363, according to... Douglas
Elliman brokerage firm. Low inventory, high demand and a shift toward larger
units in new luxury developments contributed to higher prices. The median price
of a condominium jumped 13.4% during the first quarter from the same period
last year, setting a record at $1,355,000, according to the Elliman report.
'This is the first time that we've seen this spike in price,' said Diane M.
Ramirez, the chief executive of Halstead Property, which reported that the
average price for an apartment in Manhattan set a record at $1,715,741 during
the first quarter, up 30% compared with a year ago.' ...Over all, the median
sales price rose 18.5% to $972,428 in the first quarter compared with the same
time last year, which is about 5% below the 2008 peak."

April 2 - Bloomberg (Christine Maurus): "Sales of U.S. vacation homes jumped
30% in 2013, while the share of investor purchases declined, the National Association
of Realtors said... Vacation-home sales totaled 717,000, up from 553,000 in
2012... Investment-home sales fell 8.5% to about 1.1 million transactions.
Purchases of vacation homes accounted of 13% of all deals in 2013, the biggest
share since 2006."

Ukraine/Russia Watch:

April 4 - Bloomberg (Gabrielle Coppola): "Ukraine's credit rating was cut
by Moody's..., which said escalating political tensions and the withdrawal
of Russian financial support are weakening the country's fiscal strength. Moody's
lowered the rating one level to Caa3, two steps above default, with a negative
outlook. The cut takes into account an agreement with the International Monetary
Fund to provide 'near term liquidity relief,' according to a report... The
Russian takeover of Ukraine's Black Sea Crimean peninsula has reignited Cold
War tensions with the U.S. and Europe and rattled financial markets. Ukraine's
debt may rise to the equivalent of 60% of its economic output by the end of
the year from 40.5% in 2013, Moody's said. It forecast the economy may shrink
as much as 10% in 2014."

Global Bubble Watch:

March 31 - Bloomberg (Michael P. Regan): "Pity the poor folks who have to
write letters to investors on behalf of equity-focused hedge funds this month.
Various measures of performance indicate the alternative investment vehicles
may have a lot of explaining to do in March. The Global X Guru Index ETF, which
aims to mimic returns of the top hedge-fund stock holdings, has lost 2% this
month for its worst performance versus the Standard & Poor's 500 Index
since it was created in 2012. Stocks tracked by Deutsche Bank AG with the highest
concentration of hedge fund ownership were down 4.5% from March 7 through last
week, while the S&P 500 was down 1%. Meanwhile, a Goldman Sachs Group Inc.
measure of hedge funds' favorite stocks to bet against has risen almost 3%
this year, which is not what you want to see if you are short those stocks."

April 3 - Financial Times (Josh Noble in Hong Kong and Simon Rabinovitch): "Investors
are turning increasingly bullish on Chinese markets, just as they take a more
bearish view of the country's economy. Why? Fund managers are banking on stimulus
from Beijing and have piled into financials, railways, and cement stocks to
play that theme. The latest data set did little to calm nerves about the economy.
A factory survey conducted by Markit showed activity at an eight-month low
in March..."

April 2 - Bloomberg (Leslie Picker and Elena Popina): "Sky-high valuations
mixed with murky corporate structures often scare off investors. That's less
so if the companies are from China. From microblogging site Weibo Corp. to
real-estate website Leju Holdings Ltd., China-based companies have announced
more than $2.5 billion of U.S. initial public offerings in 2014... That's the
most since the fourth quarter of 2007, when Chinese stocks in the U.S. peaked
before losing almost two-thirds of their value. The rush isn't slowing soon.
Alibaba Group Holding Ltd. is preparing to file this month for the biggest
IPO since at least 2012. Investors, who have been rewarded with an average
88% gain for buying Chinese IPOs last year, are taking risks that would make
many stock buyers wary: The companies are approaching the U.S. market with
valuations that are as much as 10 times higher than their American counterparts.
Many use a legal structure that's raised concerns among regulators, and have
accounting practices that don't always line up with those in the U.S. By poking
holes both areas..."

EM Bubble Watch:

April 3 - Bloomberg (Matthew Malinowski and Raymond Colitt): "Brazil's central
bank signaled it is ready to end the world's longest monetary tightening cycle
as economic growth falters ahead of presidential elections. The bank's board...
raised the benchmark Selic rate to 11% from 10.75%... Policy makers removed
language that had appeared in the previous statement about continuing to raise
interest rates. Dilma Rousseff is expected to run for re-election in October
after delivering the slowest economic growth of any president since Fernando
Collor, who resigned over corruption charges in 1992."

March 31 - Bloomberg (David Yong and Judy Chen): "The specter of default in
China's trust loans market is deepening the distress of property developers
that also borrowed in dollars. Eighteen companies owing $15.2 billion, from
behemoth China Vanke Co. to junk-rated Glorious Property Holdings Ltd., have
'material exposure' in excess of 10% to trust financing, a form of non-bank
lending that's helped homebuilders proliferate in China, Moody's... said. This
year alone, the number of bonds from Chinese developers considered distressed
based on their yields has almost doubled to 18. Part of China's $7.5 trillion
shadow-banking system, trust financing has been key to fueling the nation's
10 percent annual growth rate in the past decade by providing easy credit to
companies considered too risky by banks. After trust loans to the property,
solar, coal and other industries tripled in the past three years to 10.9 trillion
yuan ($1.8 trillion), bondholders are becoming increasingly alarmed as the
government reins in lending, housing demand cools and the economy slows."

April 1 - Bloomberg (Alaa Shahine and Selcuk Gokoluk): "Turkish Prime Minister
Recep Tayyip Erdogan risks upending the lira's best run in more than a year.
Erdogan's victory in the March 30 local election spurred the lira to a three-month
high yesterday, helping it post a quarterly gain for the first time since 2012.
Celebrating his win, the premier vowed to pursue foes he blames for a graft
probe that roiled markets and led to cabinet resignations. That pledge prompted
analysts at banks including Commerzbank AG and Deutsche Bank AG to predict
that the currency rally may be short-lived, with political tensions set to
persist. Erdogan's threat to pursue opponents adds to 'fundamental risks' facing
Turkey, including slower economic growth and high inflation, said Thu Lan Nguyen,
a currency strategist at Commerzbank in London. The premier's pledge signals
the risk of 'renewed escalation of political infighting, in particular, if
Erdogan takes drastic measures to fight his opposition,' she said..."

April 2 - Bloomberg (Ali Berat Meric, Benjamin Harvey and Isobel Finkel): "Bussing
tables at a busy Ankara kebab restaurant, Yunus Mutevelli says Turks are more
concerned with the money going into their own wallets than those of ministers
caught up in corruption scandals. While a daily deluge of leaked wiretaps over
the past three months sought to portray Prime Minister Recep Tayyip Erdogan
as a micro-managing kleptocrat, voters credit him with improving their quality
of life. The result: his Justice and Development Party, or AKP, trounced the
opposition in local elections to extend its 12-year undefeated streak at the
polls. 'We owe a debt of gratitude to Erdogan, and we try to pay back that
debt with our votes,' Mutevelli, 27, said... 'As long as the services continue,
our votes will continue going to Erdogan,' he added, citing handouts of food
and coal to the poor by the Ankara municipality."

China Bubble Watch:

April 3 - Bloomberg (Matthew Malinowski and Raymond Colitt): "China's debt
is poised to keep expanding faster than the economy through at least 2016,
testing the limits of a credit-driven growth model that's already exceeded
the imbalances in Japan before its lost decade. The combined ratio of government,
corporate and household debt to gross domestic product is set to climb to 236.5%
in 2016 from 225% last year, based on median estimates in a Bloomberg News
survey... The responses reflect skepticism that the Communist Party is prepared
to allow the long-term deleveraging flagged by the central bank, as leaders
focus on preventing an economic slowdown and sustaining employment. China's
debt-to-GDP ratio is already higher than India's, Brazil's and Russia's and
JPMorgan Chase & Co. says it's surpassed the level in Japan that preceded
that nation's financial crisis."

April 1 - Bloomberg: "Chinese manufacturing gauges pointed to weakness in
the world's second-biggest economy that could prompt the Communist Party leadership
to roll out additional support measures. A Purchasing Managers' Index fell
to 48 in March, the lowest reading since July, from 48.5 in February, HSBC
Holdings Plc and Markit Economics said... The reports underscore what Premier
Li Keqiang last week called 'difficulties and risks' as he tries to control
surging debt, default dangers and pollution that threatens to stoke public
discontent."

April 4 - Wall Street Journal (Dinny McMahon): "Xie Daoliang's business survives
by trading almost exclusively in a virtual currency, but not by choice. Mr.
Xie makes bulldozer treads and other parts for heavy machinery. These days,
when he makes a sale he seldom gets paid in cash. Instead, he gets a piece
of paper with a value printed on it and a promise from a bank that it will
pay at an arranged point in the future. In China's economic slowdown, businesses
are having troubles paying suppliers, and banks are getting shy about lending,
so cash is scarce. The notes -- a form of IOUs known as acceptance drafts -
are increasingly being used instead, and Mr. Xie says they really get around...
'At the moment, there's no cash. It's all just bills,' says Mr. Xie... 'It's
unreasonable.' Acceptance drafts, which are similar to postdated checks but
are guaranteed by a bank or state-owned enterprise, have been a fixture of
trade in China for years. But corporate treasurers, chief financial officers,
people at small loan firms and analysts say that as the economy slows, cutting
into companies' sales, the bills are being passed around more and more. Driving
the exchange of paper, analysts say, is an unwillingness, or inability, by
banks to meet demand for cash loans, especially from smaller companies. 'The
credit transmission mechanism is breaking, or even broken,' said Leland Miller,
president of the China Beige Book, a quarterly survey of Chinese businesses
and banks. 'Firms are having a difficult time getting access to funding, and
for small firms it's extraordinarily difficult.'"

April 3 - MarketNews International: "In speeding up slum clearance and providing
tax breaks to China's smallest companies, China's State Council is doing the
bare minimum to shore up a flagging economy. Some have seen the measures, which
also include broadening financing channels for investment in public housing,
as an echo of the 'mini stimulus' package which was announced during a similar
period of faltering growth in July last year. But they fall far short of the
more aggressive measures that some in the market had expected and indicate
that the new leadership is taking a more cautious approach to economic management
than the previous government as it focuses on reform and avoiding a repeat
of the abuses of the past. 'Investors will be making a big mistake and bad
investment decisions if they use old thinking to judge this new government,'
said a trader with a bank based in southeastern China."

March 31 - Bloomberg: "Amid the cluster of half-built brick townhouses surrounded
by budding peach groves on the outskirts of Fenghua city, south of Shanghai,
workers last week could be seen taking down metal scaffolding and hauling away
steel plates. They had heard the news about 'Cement Shen,' the nickname of
the developer whose Zhejiang Xingrun Real Estate Co. became insolvent this
month with 3.5 billion yuan ($563 million) in debt... Authorities detained
founder Shen Caixing and his son for illegal fundraising, Xu Mengting, director
of the government information office, said... 'The developer owed us hundreds
of thousands of yuan' for scaffolding and steel, said workers Xie and Wang...
'We are taking these materials back for now, because there's no work here.'
The insolvency may portend difficult times ahead for small developers. China
has almost 90,000 of them nationwide, National Bureau of Statistics data show.
As new-home price growth slows in China and cash-flow conditions tighten, more
local builders like Xingrun will face defaults, Fitch... Hong Kong-based analyst
Andy Chang wrote..."

April 2 - Bloomberg: "The Chinese steel industry's ability to survive 1 billion
yuan ($161 million) of losses per month without more defaults is under threat
as a slump in iron ore and the yuan undermines a key source of financing. The
currency has weakened 2.5% this year and a measure of exchange-rate swings
reached a record, prompting Goldman Sachs Group Inc. to predict funding that
uses the steelmaking ingredient as collateral will drop over the next two years
due to foreign-exchange hedging costs... Chinese steelmakers, which account
for almost half of the world's production, can ill afford a funding squeeze
as an industry association reported 43% of them made losses in January amid
an 8.6% slump in demand from a year earlier... 'Private steelmakers will see
very significant operational problems and funding issues this year, so we could
see another default,' Sangyun Han, a Hong Kong-based credit analyst at Standard & Poor's
Ratings Services, said... 'Higher volatility of the currency is another negative
factor in their financing in addition to volatile iron ore prices and weak
demand.'"

April 3 - Bloomberg: "China's one-year interest-rate swaps touched the highest
level in almost a month after the central bank drained cash from the financial
system for an eighth week. The People's Bank of China absorbed 90 billion yuan
($14.5bn) issuing 14- and 28-day repurchase agreements today... That took this
week's net withdrawal to 62 billion yuan..."

March 31 - Bloomberg (Fion Li): "China's short-term bond yields are sliding
at the fastest pace in five years as speculation builds that monetary policy
will be loosened to combat what Premier Li Keqiang says are "difficulties and
risks" for the economy. The yield on the government's two-year bonds tumbled
93 bps this quarter to 3.41%, ChinaBond data show. That would be the biggest
decline since a 214 bps drop in the final three months of 2008, when global
credit markets seized after Lehman Brothers Holdings Inc. collapsed. The average
yield on local currency sovereign debt in emerging markets fell six basis points
since Dec. 31 to 5.50%..."

April 2 - Bloomberg (Foster Wong): "Hong Kong's syndicated loan market enjoyed
a record first quarter as Chinese companies shunned local financing in favor
of cheaper offshore funds. Lending in the city surged 41% to $20.8 billion
in the first three months compared with a year earlier, the busiest start since
Bloomberg starting tracking the data in 1999. Volumes in China shrank 45% to
$5.8 billion, the worst first quarter in four years. Onshore borrowing costs
for the nation's top-rated companies jumped 30 bps to 5.89% in March, the biggest
monthly rise since November, ChinaBond data show."

Japan Watch:

April 4 - Wall Street Journal (Jacob M. Schlesinger): "For a year, the Bank
of Japan's new leadership has drawn surprisingly little flack while executing
a self-proclaimed aggressive 'regime change,' breaking from a decade of more
cautious policymaking. Now the repudiated old guard is striking back, publicly
ringing alarm bells about the lurking dangers of a massive money-printing program...
Kunio Okina, a long-time BOJ official widely considered Japan's most influential
monetary economist in the 1990s and 2000s, delivered a speech Friday dissecting
what he called 'the Achilles' heel of Abenomics,' a reference to the economic
revival plan of Prime Minister Shinzo Abe. Abenomics relies heavily on turbocharging
the restrained monetary policy long advocated by Mr. Okina and his disciples.
In the speech, Mr. Okina warned about longer-term risks from the policies launched
in April 2013 by Mr. Abe's handpicked Bank of Japan governor, Haruhiko Kuroda...
At one point in the speech, Mr. Okina compared current Japanese economic policy
to the recent disastrous experience of Zimbabwe, which was plagued by rampant
inflation and colossal government debt."

April 3 - Bloomberg (Keiko Ujikane): "Japanese banks are the most keen to
lend companies money in 17 years. Corporate treasurers don't need the cash.
A Bank of Japan index measuring the prevalence of mid-sized companies saying
banks are willing to make loans rose to 19 in March, the highest since June
1997... Yet demand for loans from businesses remains below levels before the
global financial crisis, other central bank data show. The BOJ's unprecedented
monthly buying of about 7 trillion yen ($67bn) of sovereign notes has flooded
Japan's markets with funds to encourage banks to boost lending... Companies...
have built buffers since the financial crisis with total cash holdings of non-financial
Topix index members reaching the equivalent of $636 billion in latest filings,
from $417 billion in March 2007..."

April 2 - Bloomberg (Toru Fujioka and Keiko Ujikane): "Japanese Prime Minister
Shinzo Abe's bid to rid the economy of 15 years of deflation got a boost, as
companies forecast sustained price gains. The inflation rate will be 1.5% in
a year's time and 1.7% in three years and in five years, according to average
forecasts in a Bank of Japan survey... The data give the central bank another
reason to hold off from any immediate additional monetary easing as it assesses
the blow to economic growth from yesterday's sales-tax increase."

Europe Watch:

April 4 - MarketNews International (Craig Torres and Michelle Jamrisko): "EU
Economics and Monetary Affairs Commissioner Olli Rehn and ECB Governing Council
member Jens Weidmann warned against giving France more time to meet its deficit
targets... In excerpts of the interviews..., the two top officials warned that
granting France additional leeway to meet its deficit goals would set a bad
example for other EU member states. 'If France or any other large member state
were to be granted more flexibility, this would immediately be used as a reference
for other member states,' Rehn told the paper, noting France had already received
two delays. 'How we deal with one country has a clear impact on what we can
ask of other countries. That is why it is especially important that we stick
to the rules and don't fiddle about with them,' Rehn said. Weidmann, who also
heads Germany's Bundesbank, said it would be up to Germany's government to
support the EU Commission in its efforts to take a hard line with France. 'What
counts now is that the European Commission interprets the existing agreements
strictly and is supported in this by the [German] government,' Weidmann told
the paper."

April 1 - Bloomberg (Angeline Benoit and Emma Charlton): "Europe's two-speed
economy was underscored in data today showing strengthening in the German labor
market just as Italy's jobless rate reached a record. Overall euro-area unemployment
was at 11.9% in February, lower than the 12% median forecast... In Italy it
rose to 13%, while in Germany the locally defined jobless rate for March stayed
at the lowest in at least two decades. The divergence between the region's
third-biggest and largest economies highlights the challenge faced by the European
Central Bank's Governing Council as it meets this week to assess the need for
stimulus and gauge the risk of deflation at a time when consumer prices are
increasing at about a quarter of the pace that officials would like."